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Double Dealing by Payments Companies: How Visa and MasterCard Earn on Digital Junk

Anastasia Ermolaeva

The payment giants MasterCard and Visa by turns issue patents for their blockchain developments and introduce new DLT-based products. On October 21, Visa announced the expansion of partnership agreements in preparation for the launch of a new payment service B2B Connect on the blockchain, which is scheduled for the first quarter of 2019. The new payment service, which is designed to solve problems with traditional cross-border and cross-currency non-card payments, will integrate the IBM’s open-source technology Hyperledger Fabric.

The main feature of the new Visa product implies tokenization of confidential information such as bank details and accounts, and generation of a unique identifier for each transaction, which will make transfers on the platform more secure and simple, while the system will reject transactions that it has doubts about. The Head of Visa Business Solutions Kevin PHALLEN believes that digital identification will significantly reduce the risks of frauds that do occur during checks, ACH and wire transfers today, as well as help companies to comply with the rules of the regulated financial ecosystem and operate effectively within it.

The financial giant believes that Hyperledger Fabric is one of the most scalable solutions on the Ethereum blockchain, which will ensure the smooth operation of cross-border payments and create trust between transactions parties.

But for all the sympathy of the payment system towards blockchain, Visa together with other providers continues to have a negative perception of cryptocurrencies. This spring Visa’s Chief Financial Officer Vasant PRABHU called Bitcoin and other digital assets a bubble and a money laundering tool, adding that “every crook and every dirty politician in the world, I bet, is in cryptocurrency”, but “it’s very hard to get dirty money through a banking system”. In turn, the President and Chief Executive Officer of MasterCard Ajay BANGA did not hold back to call cryptocurrencies “junk”, emphasizing there is no chance for digital currencies to become a full-fledged means of payment. However, payment giants are not just making quite caustic remarks, they have long started to introduce rules on “their” territory.

Visa and MasterCard qualified cryptocurrency transactions as pulling cash out of an ATM or how they introduced an additional fee

In February, Coinbase customers faced additional fees by purchasing crypto with Visa and MasterCard credit and debit cards. For this payment method the exchange itself charges the highest of its fees - 3.99%.

This is due to the fact that payment by card is the most popular way to buy virtual currency. According to the survey of the payment operator Worldcare, 57% of cryptocurrency buyers purchased digital assets using bank cards: 21% bought via credit cards, 36% - through the debit ones. The popularity of this payment method is easily explained by the possibility of purchasing digital assets in real time, while wire transfers or via ACH take a few days.

The payment operators reclassified the purchase of cryptocurrencies into “cash advance", which allowed banks and card issuers to charge additional fees, that on average amount to 5% while each financial institution has the right to set its own fees. Moreover, this kind of operation do not fall under the standard interest-free grace periods that are applied to other purchases via cards, and interest rates are higher reaching up to 25.99%.

In other words, if you want to invest $10,000 in cryptocurrencies, the fees may total in about $900 plus the interest, which reduces the attractiveness of the digital currency and makes investments economically unprofitable, since the return on investment will have to be at least 10%, so that an investor can cover the expenses. If in last year`s winter and at the beginning of this year, such a return was possible, then now, in the conditions of the bear market and a decrease in the level of volatility of the main currencies, such a return on investment is unlikely and possible only with shit coins. Their rate can grow dramatically in the case of pump, but to catch this moment is quite difficult, unless you are one of the organizers of this scam. As a result, initially high costs for the digital assets acquisition together with the high risks associated with the lack of a guaranteed value growth, make investments ineffective, which could be one of the reasons behind  the reduction of trading volumes on the Coinbase exchange to an annual bottom of $10.3 bln in Q3 of 2018.

“The unilateral decision to change the category was nothing but a cash grab with the desire to punish and deter people in the cryptosphere from buying cryptocurrencies”, - says the Founder and CEO of the Crypto Wild West Show podcast Andrew TAYLOR. The expert tells us that such punitive measures were very costly at the initial stage. “There was no notification given, transactions were reversed, and then before a credit was given to the user, there were charges again, causing overdrafts, etc. This was borderline criminal activity. Coinbase ended up absorbing much of these expenses when the credit card companies should have. There has been Class Action lawsuits filed against JP Morgan Chase, Bank of America and others for this. I am not surprised”, - he concludes.

It is worth noting that payment operators have introduced new rules for all cryptocurrency exchanges that accept payments via customers’ cards. They explained that assigning the appropriate category and code to crypto transactions will allow issuers to make the correct decisions when authorizing users. Moreover, payment companies focused on the fact that issuers decide whether to charge additional fees and if yes, then - in what amount; and they themselves have nothing to do with it. But is this really the case?

It may seem that only card issuers really benefit from such innovations. However, the fact is that both MasterCard and Visa set interchange fees that are charged for each transaction on the cards.

Let’s figure out how it works and consider the scheme of buying cryptocurrency by a bank card. The client sends a request to the crypto-exchange. The acquiring bank of the exchange sends the details of the purchase to the financial institution of the card holder and when it receives the payment guarantee, gives the go-ahead to the exchange, which transfers the cryptocurrency to the buyer's wallet. After that, the issuing bank transfers to the acquiring bank the amount agreed in advance however less by the amount of the interchange fee, which is paid to the payment operator.  

New fees in cryptocurrency transactions demonstrates the usurious approach of payment giants to business, says Andrew TAYLOR. The expert cites the example of small businesses, where traditional payment systems take 25% of the total profits. At the same time, they can not efficiently operate without utilizing the payment providers services, as this can significantly limits the client base of businesses. With the advent of electronic currencies, the situation may change. "As adoption of cryptocurrency payment methods increases and becomes more universal, the leverage, Visa, MC, Discover have, will decrease and fees will come into line", - our expert concludes.

Cryptocurrency cards - To Be

Another source of income was supposed to be cryptocurrency cards, but at the beginning of the year the European branch of Visa suddenly stopped servicing prepaid debit Bitcoin cards issued by the Gibraltar financial company WaveCrest, which affected its customers the most - cryptocurrency payment services such as CryptoPay, BitPay, Bitwala, TenX, Wirex and others. They had no choice but to return the funds to users. The news had a negative impact on the cost of their tokens. For example, the PAY token tied to the Tenx card fell in the price by 15%.

The payment company referred to numerous non-compliance violations of Visa’s rules and policies by WaveCrest, which created risks for the integrity and security of the payment system."Visa has other approved card programmes that use fiat funds converted from cryptocurrency in a number of jurisdictions. The termination of WaveCrest’s Visa membership does not affect these other products", - the company stated at the time. However, members of the crypto community suspected the payment giant of willing to slow down the rapidly developing sector, relating it with the fear of losing its influence and market share to cryptocurrencies. Indeed, Visa stopped cooperation in early January of this year, when the entire crypto industry was experiencing an incredible rise and there were more and more investors in digital currencies coming. "The fact is that traditional financial institutions see their monopoly being threatened. By assuming these positions, they are hurting the people who are the most limited in their options because of limited resources and information. However, their punitive approach is not endearing them to their customers, it is in fact pushing them to more aggressively seek alternatives”, - says Andrew TAYLOR.

Why, in this case, in September there was the first batch of 100,000 copies of cryptocurrency debit cards MCO Visa, the issuers of which are the Hong Kong-based blockchain startup Crypto.com, formerly known as Monaco, and the Singapore branch of the German fintech company Wirecard Bank? And on October 22, the cryptocurrency platform Wirex announces the launch of prepaid debit crypto cards Visa in the US? Likely, the payment giant knows what financial opportunities it might miss out, and if it’s not a provider for new services and products, its competitors will come into play. "There is a mad dash to bridge these gaps by almost all larger financial institutions as they are beginning to realize cryptocurrencies are here to stay. Most of them are seeking ways to get involved so as not to lose their Golden Goose”, - continues Andrew TAYLOR.

According to the Visa’s annual report of 2017, the transactions volume in the payment network amounted to $10.2 trln in monetary terms, with this number of transfers the operator managed to obtain the net operating revenues of $18.4 bln. By adding the processing of at least 35% of the daily crypto transactions volume it can bring roughly another $5.5 mln daily or $2 bln annually, which will add almost 11% of revenue. It turns out that having stopped to cooperate with the leader of cryptocurrency cards WaveCrest,that it was then, Visa did not put an end to cryptocurrencies for itself, but only slowed down the development of crypto-fiat transactions in the entire industry, in order to win the time it took for regulators to pay attention to the sphere, and new projects that began to enter the market prepared with much more transparent proposals.

High risks for some mean high revenues for others

At the same time, the desire of the payment giants to control the extension of crypto operations and make money on them does not end there. On October 15, new MasterCard restrictions on holders of their MasterCard, Debit MasterCard and Maestro cards came into force with respect to transactions with cryptocurrencies, ICO, as well as binary options, Forex, contracts for difference (CFD).

All companies that operate without a license or their activities do not require it, and are parties in such transactions fall into the category of “high-risk securities merchants”. This implies a more thorough control of transactions and an increase in the time period for chargebacks to be executed of up to 540 days after the date of the transaction.

The Blockchain consultant Ami RAJPAL believes that by doing so, the payment giant has created a new opportunity for itself to earn on digital assets, as now it can conduct chargebacks at the most convenient time: “All you have to do is to do chargebacks, when the value of the coin used is lower than at the time of purchase. Which can be done very easy with a 540 day window, especially considering their volatility".   

Such merchants may be ICO issuers, brokers and cryptocurrency exchanges. Those wishing to continue using the cards in their operation should confirm the legality of their activities in the jurisdictions in which they conduct and process transactions, which can be quite problematic due to the low degree of regulation of the crypto sphere in most countries of the world.

MasterCard has been applying the new classification since October 15, and some brokers and exchanges have already notified their clients that they have stopped accepting credit card deposits. Visa plans to implement these regulations in December.

“As the options increase for consumers, the attack on cryptocurrencies will increase either. At some point, the battle by payment companies will be lost, especially as larger players enter the market out of FOMO”, - Andrew TAYLOR sums up. Another our expert, IT-Director of a blockchain company Pantelis KOKKALIS claims that the following phrase “if you cannot fight them, join them” suites perfectly the relations of traditional payment providers with cryptocurrencies. He believes that: “The payment giants will be forced to include major cryptos as the popularity and confidence in them increases. Crypto regulation of some form will also increase confidence. Payment companies do not like the anonymity of ownership of crypto assets but including them will change all that – there will be an association of crypto addresses to “real” accounts and payment systems. They just need to bridge the gap and embrace the new innovations. To me it sounds inevitable".

So far, we have been watching only a double game of payment giants. They are trying to strangle the crypto industry, but gently, not to death, because even for them it has become a source of income. There is no doubt that they will try to find even more opportunities to make a profit by introducing new restrictions and preparing the market for their own new product releases.

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